Citadel Securities reversed its bearish call on long bonds, warning of a painful short unwind

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The firm warned that heavily crowded short positioning in long-dated Treasuries raises the risk of a painful reversal for investors caught on the wrong side

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Citadel Securities reversed its bearish stance on long-dated U.S. government bonds, warning that the trade against them has become so crowded that any shift in direction could force a painful unwind, according to MarketWatch.

The warning comes at a moment of heightened focus on the Treasury market's long end, where the 30-year yield climbed to its loftiest level since 2007 before Treasury Secretary Scott Bessent stepped in with an expanded bond buyback program, according to MarketWatch.

Citadel Securities described the Treasury's move as a form of Operation Twist rather than quantitative easing. Treasury is purchasing off-the-run bonds from dealers while financing those purchases through additional short-dated issuance, leaving the overall stock of government debt unchanged and system liquidity broadly neutral, the firm said. The effect is to reduce the duration the private market must absorb, putting downward pressure on long yields and flattening the curve.

The firm said the signaling effect may matter as much as the actual flow of purchases. The intervention indicates the administration is uncomfortable with elevated long-end yields and prepared to use debt-management policy to resist them, Citadel Securities said. It also drew a connection between the buyback expansion and U.S. participation in yen intervention, noting that Japan holds roughly $1.12 trillion in Treasuries — about 12% of reported foreign holdings — and that limiting the risk of forced Treasury sales by Japanese investors was a plausible motive behind Treasury's willingness to support the Japanese Ministry of Finance.

Citadel Securities cautioned that while such interventions can reduce the duration reaching private markets, they do not resolve the underlying fiscal pressures that have driven yields higher. If bond prices are held above where they would otherwise clear, the adjustment is more likely to appear through a weaker dollar, which would ease financial conditions and add to inflation through stronger nominal demand and higher import prices, the firm said. The durable solution, it argued, requires harder fiscal choices and central banks that are willing to get ahead of inflation — including by raising rates if necessary.

The Citadel Securities view stands in contrast to that of Stanley Druckenmiller, the billionaire founder of Duquesne Family Office, who called the Treasury's buyback expansion a "mistake" driven by "price management" that will ultimately fail. Druckenmiller argued that the only path to sustainably lower long-term yields is deficit reduction, not buybacks, and warned that debt management that appears to follow the political calendar erodes institutional credibility built over two centuries.

Treasury announced the buyback expansion earlier this month, raising the per-operation ceiling from $2 billion to at least $4 billion for the 10-to-20-year and 20-to-30-year sectors, with the larger operations running from September 9 through November 4. The U.S. Treasury has also been weighing whether to draw on its roughly $1 trillion General Account to help fund the program.

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